All eyes will be focused on Washington later this afternoon as the FOMC meeting concludes around 2:15 pm EST. Based on how the market is reacting at the present time, a rate cut that last week was thought to be a sure thing, has now become somewhat debatable. The USD is stronger this morning ahead of the FED announcement, while the press conference and accompanying statement will be closely watched. Based on Fed funds futures, there is only a 54.2% chance of a 25 bps cut to 1.75-2.00%. Last week, this number had been 87.2%.
The expected uptick for the Euro after the ECB relaunched Quantitative Easing last week has not occurred. Pressure remains on the downside as analysts fear the German economy could slip into a technical recession in Q3. Adding to the negative sentiment is the potential of US tariffs on imports of EU cars. EU ZEW economic sentiment improved to -22.4 in the last month compared to the -43.6 for the previous month, but economists are still pessimistic regarding the EU economy.
GBP/USD moved lower as UK headline CPI came in at 1.7% below market expectations. Ongoing Brexit negotiations appear stagnant as we move closer to the October 31 deadline. According to the Financial Times, Bank of England Governor Mark Carney, will extend his term beyond the January 31 deadline to ensure a smooth Brexit transition, whenever that may be. A smooth transition is the top priority of the Bank of England.
According to White House economic advisor Lawrence Kudlow, the US-Japan trade deal should be formally announced later this month. When the UN General Assembly meets in New York on September 25, President Trump and Japanese Prime Minister Shinzo Abe will meet and an announcement is expected.
As the oil prices go, so goes the Canadian Dollar. Oil prices fell around 6% on Tuesday as Saudi Arabia announced that they had used inventories to restore supplies to where they stood before the drone attacks.
Economic advisor Kudlow also spoke about the ongoing US-China trade negotiations. He made the comment that “there’s a little music in the air, which is not always so, so we should enjoy the day.” This was a quaint way of saying that negotiations are continuing as deputy level meetings will continue Thursday and Friday in Washington. The “high-level” trade talks begin in mid-October.
FOMC Rate Decision Update:
The FOMC meeting ended today with the FED cutting rates by 25 bps to 1.75-2.00%, which was expected by market analysts. What wasn’t expected was the division by FED members as to cutting rates. According to reports from inside the meeting, five members of the FOMC thought that rates should have remained in their previous range of 2.00-2.25%. Five members approved of the cut but do not want to see another cut for the rest of the year. Seven members are in favor of one more cut in 2019.
The difference in sentiment by FED regional presidents was considerable as two presidents wanted to keep the rates steady, while one president wanted a 50 bp cut. According to analysts, this is the most dissents for a FED rate decision since December of 2014.
The policy statement was roughly the same and the committee commented on the implications of global developments as a rationale for the rate cut. This is interesting because the FED usually reacts to domestic and not international economic pressures.
US equity markets are lower after the announcement as the DOW has fallen about 195 points. USD has strengthened following the announcement.
President Trump tweeted that the “Federal Reserve fails again, no guts, no sense, no vision.” Given his continued criticism of the Federal Reserve, these comments are not a surprise. It is clear that the FED is not being pressured by the executive branch and is acting as an independent unit.
During the news conference following the interest rate announcement, FED Chairman Jerome Powell stated the FED is committed to making the best decisions to keep the US economy strong. He also said we are in the 11th year of economic expansion. Solid consumer confidence has been a key driver here. Slower growth abroad is one concern due to uncertainty moving forward. Uncertainty about trade policy keeps businesses from further investment. Expectation of real GDP growth is still at 2%. The job markets should remain strong and should continue to do so. The future course of monetary policy will depend on how the economy evolves.